Ten Steps to Reforming Baby Boomer Retirement

Policy Reports | Retirement

No. 283
Thursday, March 23, 2006
by John C. Goodman, Devon Herrick, Matt Moore

Step 10. Paying for Long-Term Care

The demand for long-term care is projected to grow rapidly as the Baby Boom generation begins to retire. The population over age 65 will grow by nearly two-thirds (64 percent) by 2020, and the number of seniors over age 85 will grow by 84 percent by 2025.52 About 9 million seniors needed long-term care in 2005, according to the Centers for Medicare and Medicaid Services. This is expected to increase to 12 million seniors by 2020. As a group, seniors have about a 40 percent chance of entering a nursing home, and of those, about 10 percent will stay five years or more.53

Most nursing home stays are short and provide recuperative or rehabilitative care following an illness or hospital stay. For patients too sick to care for themselves at home but no longer in need of hospitalization, nursing homes are an important component in the continuum of care. However, the only nursing home care that Medicare will reimburse is medically necessary skilled nursing of a limited duration. Most long-term care provided in the United States assists disabled seniors with daily living activities such as bathing, dressing, meals and so forth. These services, commonly referred to as custodial care, are not paid for by Medicare.

Seniors in need of custodial care - whether in their home or in a nursing facility - must either pay for it out-of-pocket or purchase long-term care insurance. Although private insurance is available to cover the cost of long-term care, including home care, most seniors do not purchase coverage. Low-income seniors, and those who exhaust their savings, depend on Medicaid to cover their long-term care. Today, Medicaid pays for more than half of all long-term care.

In general, people must spend down their assets and meet certain income requirements before they qualify for Medicaid.54 This gives people incentives to arrange their financial affairs just to meet asset and income tests for Medicaid long-term care benefits. There is a large elder law industry that assists middle-income seniors in sheltering assets to qualify for Medicaid.

"Seniors should protect their assets with private long-term care insurance."

Protecting Assets Through Long-Term Care Insurance. A pilot project in four states - Indiana, New York, Connecticut and California - called the Partnerships for Long Term Care, gives people financial incentives to purchase private long-term care insurance. There are currently two versions of this program.55 A dollar-for-dollar asset shelter model is used in California, Connecticut and Indiana. Consumers purchase any amount of long-term care coverage they wish. In the event a policyholder requires nursing home care, he or she first relies on the long-term care insurance. When the insurance is exhausted, special eligibility rules allow the purchaser to receive Medicaid benefits while retaining assets equal to the value of the policy. For instance, a long-term care policy with $120,000 in benefits allows an individual to shelter $120,000 in assets and still qualify for Medicaid long-term care. Since most nursing home stays are a little less than one year, very few of those who have purchased policies have had to apply for Medicaid benefits.

New York Partnership policies are required to cover the cost of three years of nursing home care or six years of home care. This potentially means seniors must insure for more than $200,000 worth of services. In return, participants can shelter all their assets, not just an amount equal to the coverage received.56 (Indiana uses a hybrid of the two approaches.) However, New York Partnership policies are more expensive.

Such lengthy (and expensive) coverage may be unnecessary. The average length of stay for discharged nursing home residents is just under one year (272 days).57 A study by the actuarial firm Milliman USA of people with unlimited long-term care coverage found that less than 8 percent of claims were for periods lasting more than 48 months. More than three-fourths of claims (76.7 percent) were less than two years' duration.58 This suggests that a more limited amount of coverage would pay the cost of nursing home care for most seniors. As little as one year might suffice.

Recent federal legislation allows all states to establish Partnership programs. Now they need to act.59

Making Long-Term Care Premiums Tax-Deductible. Few seniors purchase long-term care insurance, and even fewer working-age adults - even though 40 percent of nursing home residents are under age 65. One reason is that long-term care insurance is not given the same tax treatment as other health insurance.60 The amount of long-term care premiums that are tax deductible is limited based on age. For instance, individuals under 40 years of age can only deduct $260 per year while those 41 to 50 years old can deduct $490, 51- to 60-year-olds can deduct $980, 61- to 70-year-olds can deduct $2,600, and seniors over 70 can deduct $3,250. 61 These limits are too low to cover the cost of insurance for older workers.

People can also use their HSAs or Flexible Spending Accounts (FSAs) to pay a limited amount of long-term care premiums tax-free. Unfortunately, many people don't have access to either HSAs or FSAs. Theoretically, current law allows any American under age 65 to establish an HSA. But the law requires the HSA to be accompanied by a high-deductible health plan. Individuals (and their employers) should be allowed to set up HSAs regardless of their insurance coverage. Just as there are a variety of accounts available to save for retirement, there should be a variety of HSAs in which individuals can save for future medical expenses.

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